I saw this article on Bloomberg.com and what was curious about it was that there was at least some partial understanding of the dynamics behind why this auction "failed."
“The central bank has apparently started to fine-tune its previously loose monetary policy,” said Dong Dezhi, a Shanghai- based bond analyst with Bank of China Ltd., the country’s third- largest lender. “With higher bill rates it can drain money from banks to curb new loans.”
While China's central bank has not officially increased rates, it apparently has been draining reserves and that's the reason for the weak bill demand. (See chart below.)
Yet this is never the explanation when something of this nature happens in the U.S. When it happens here it is because we are broke.
Yet, apparently, even with its vast hoard of savings China can have failed bill auctions too! Somewhat left out of the analysis, however, was the fact that the only determinant as to whether or not auctions "succeed" or "fail," in China, the U.S. or any other nation that spends in its own currency, is entirely up to the policies of the central bank.
As an aside, this will be the first real test of China's rebound. Rising interest rates in and of themselves cannot kill an economic rebound if demand remains strong. As long as the government continues to spend to sustain demand and with Chinese household savings back at very high levels, this fine tuning of reserves, meant to nudge rates up a bit, should have little more than a fleeting effect on the Chinese market.
Stay tuned...
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